Receiving an inheritance

I wanted to write about what you may receive as an inheritance and what you might consider doing with an inheritance you receive. If someone in your family has passed away, my condolences. Before you receive the inheritance Before you receive your inheritance there are a number of steps that need to be taken (see more about death and tax in my other article – death and tax). One step is where the will and a list of the deceased assets are taken to the court and it is decided whether the will is valid and whether the executor can act as the will allows – this is called Probate. Only after all the steps are completed can the executor distribute the assets to the beneficiaries. Often the distribution of the assets (i.e. inheritances) will be the final step, however there can be an ‘interim’ distribution (for example other assets might be distributed before a property which is currently being sold) Takes time So it takes time for the assets or cash to be distributed to beneficiaries. Inheritance – cash Some inheritances will simply allow for a cash gift. For example I gift $x to my grandson John Smith. Cash is not taxable to the recipients (as it is not income) – similar to a gift or loan from a family member not being taxable. So you don’t have to put an inheritance in your tax return. Of course though it you put the money you received into a term deposit, then the income you earn would need to be included in your tax return. Inheritance – shares, property, business, other assets You could inherit something other than cash. Shares and property are sometimes divided between beneficiaries. There is no tax impact on receiving assets, however there may be tax on selling them at a later point. General rules for inheriting capital gains assets If the deceased purchased the asset after 1985 (when capital gains tax was introduced) you inherit the asset with the purchase price and purchase date of the deceased (this is called the ‘cost base’ in tax terms). So for tax purposes it just as if the owner is the only thing that has changed. If the asset was purchased pre-CGT (before September 1985) your cost is the market value of the asset on the date of death. In this case – it is like you bought the asset from the deceased on the day of their death (at market price). Given that for an asset to be pre CGT it would have been held for 25 years – there are fewer and fewer assets are still pre-CGT. Given the tax free treatment though, people holding pre-CGT assets may have been advised not to sell. The inheritance – shares You can inherit shares. Shares are probably the next common to cash as they are easy to divide between beneficiaries (ie. A 3rd or a 5th of all shares held is easy to do, while a 5th of a house isn’t easy to split!) Pre-CGT example Say if you inherit 100 BHP shares your grandfather bought in 1980 (pre CGT in September 1985) – great the market value of the shares at time of death (say $39) – means you won’t be hit with a bit capital gain (you might even have a capital loss if when you sell the shares are worth less than you received them for). If there is a capital gain, you may want to hold the shares for at least a year and a day to get the 50% capital gains discount. Post-CGT Say if you also inherited 100 Commonwealth Bank shares your grandfather got in the float at $3 in 1996. So if you sold the shares (now worth $25 each) you would make a large capital gain (taxed at your marginal rate). The inheritance – property You could also inherit a property (or part of a property). There are specific rules about acquiring a deceased person’s property which can mean you will have pay capital gains tax when you sell.